Tag Archives: recession

Summary: The monthly job numbers tell us much, but the headline number about which the press obsesses tells us almost nothing. This post looks at the trends that shape America as shown in this report, and especially the surprises.

Journalists and economists ask if we are in a recession. The tabloid investment media screams “yes”. Last week Professor James Hamilton provided a clear answer: no. It’s the wrong question. We should be like sailors, scanning the horizon to see the storm before it hits, taking incremental steps to prepare as the odds of a storm grow – eventually battening down the hatches and reefing the sails — before it’s too late to do so.

Macroeconomic data provides our best warnings of economic storms. The monthly payroll report — released today for January — gets massive attention, but we must dig to get the useful insights.

The headline job number is too volatile and too heavily revised for use (also, it is a lagging indicator), but the trend in the percent change year over year NSA tells us much – the rate of growth slows rapidly in the year before a recession, hence months before stocks roll over. Payroll growth peaked in February 2015 at 2.3%, steadily falling to 1.9% in January.

Let’s look below the headline number at some of the weaker sectors. Such as manufacturing, so far the center of the downturn. Manufacturing added 29,000 jobs in January, the second monthly gain and the largest since November 2014. What does this mean? I have no idea. It is an anomaly. Economists and journalists seldom point to anomalies in the data, although that should be a priority. Anomalies point to changes in trends and errors in our beliefs.

Summary: The economy is slowing. We are probably not in a recession, let alone beginning the end times depression doomsters have so often predicted. On the other hand, continued slowing seems likely, and a little more and we will have a recession. Let’s look at some key indicators. {First of two posts today.}

Contents

Manufacturing; one piston of the US economy’s engine

Transportation and trade

The Bottom Line: US & world growth

For More Information

(1) Manufacturing; one piston of the US economy’s engine

December’s Advance Report on Durable Goods shows a continued slow decline, especially new orders. The monthly decline in December was large, but not unusually so for this volatile data. It doesn’t scream “recession”.

Nor does the year-over-year decline of 1.7% SA scream “recession”. It is not even unusual. New orders often decrease without a recession following; it has happened several times during this expansion. The data only goes back to 1993.

Summary: For the past year I’ve warned that the economy is slowing. For the past three months I’ve warned that a recession is coming. Now let’s consider the likely effects, and how you can prepare.

The odds of a stock market crash are high.

Are you at or near ground zero, to be hurt by the crash or its after-effects?

Will you be affected by its ripples — or the recession that probably causes the crash?

Here are the likely worst affected industries and regions. Prepare now if you’re in them, or if you are over-weight their stocks.

A crash is coming soon. I believe (aka guess) it will happen in 2016, when stocks are knocked down by the combination of a recession, liquidation of margin debt, and collapse of valuations.

Valuations are a particular weak spot of stock. Now near record high levels, they are among the most mean-reverting of economic series on a generational basis (i.e., they collapse and then return to the average of the past 10 or 20 years). Stock prices might drop roughly by half, as they did after the last two bubbles popped.

What does a stock market decline do to the economy? Let’s count the ways.

Summary: It’s time to prepare for a possible recession in 2016. The manufacturing slump continues to deepen. A toxic combo: high inventories in November and weak retail sales in December. In February this expansion will tie for the 3rd longest expansion. {2nd of 2 posts today.}

The Atlanta Fed’s GDPnow model just lowered its est for Q4 real GDP from +0.8% to +0.6%. It is not better than carbon-based economists, but provides a different perspective. The *average* revision of real GDP is 1.2% from the advance announcement (coming Jan 20) to the final. The standard deviation is 1.0 — so a 2.4% revision is commonplace (roughly once every five years). Q4 real GDP could easily be red. We might already be in a recession.

Many people believe that the “government is out of bullets” to fight the next recession. We can take reassurance in the fact that they are wrong, and that the government has powerful tools to fight the next recession. We are not back in the horrific late 19th century, with its frequent and deep recessions — and no government counter-cyclical action.

Summary: The recent decline in US stock prices reflects rising worries about a recession this year. Should you worry? What do economists expect? What indicators should you watch in the river of data flowing by every day? How can you prepare for a possible recession?

Summary: The great and wise believed that Trump was a sideshow fool. Now that he decisively leads in the Republican race, they believe he might get the GOP nomination, but has no chance against Clinton. A simple example shows why that is not correct. If the polls are even roughly accurate, an easily imaginable event could put Trump in the White House.

Photographer: Victor J. Blue/Bloomberg

Contents

The GOP contest: Trump on top.

Hillary vs. Trump: it’s close.

Trump’s hope: a recession.

Conclusions.

More about the Trump revolution.

For More Information.

(1) The GOP contest: Trump on top

Trump’s ratings have risen despite opposition of the news media and the GOP leadership. Now he has to translate that into votes in the primaries. Civis Analytics, a Democratic data firm, has published detailed demographic data about Trump’s supporters. It is quite broad, showing that he has the necessary base. His ability to build the necessary organization remains unknown.

(2) Hillary vs. Trump

Hillary’s lead over Trump is only slightly larger than these polls’ typical 3 percentage point margin of error with a 95% level of confidence. The most recent three polls show Clinton’s lead as +7%, +2%, and then +1%. This makes the confidence of the great and wise in Hillary’s victory seem exaggerated. The election could be close if Trump builds a campaign machine and just maintains his current strength in the polls. But he might need a lucky break to win…

Summary: As the expansion ages and growth slows, we should begin to watch for signs that the next recession approaches. Here are some tips for doing so without spending much time at it — avoiding the complacency of Wall Street’s economists and the exaggerated darkness of the popular permabears (such as Zero Hedge). {2nd of 2 posts today.}

What should we watch among the blizzard of economic data? Journalists tend to focus on the numbers most frequently reported, usually about manufacturing and housing. Such as this week’s existing home sales volume (oddly, we don’t similarly obsess over NYSE volume). It’s important for people in that biz, but tells us little about the US economy.

Also big in the news are new home sales, building permits, mortgage applications, and many other housing datapoints. For a simple measure of this industry see total residential construction spending. It shows a continued strong expansion. Tune in next month to see if anything has changed.

What are the most important economic numbers?

But the often dramatic graphs don’t tell us the importance of those numbers. Here’s one perspective on the big picture…

Another way to see this relationship: manufacturing new orders were 15% of GDP in 1995; now they’re only 10%. Manufacturers employed 30% of all non-farm workers in 1955; they employ only 9% today. Manufacturing was once the key swing sector of the economy; now we are a services economy. Unfortunately there are few good leading indicators for the service sector. Creating Purchasing Managers Indexes for Services was a creative idea, but untested — and doesn’t make much sense to me: what do they PM’s of service corps do that gives them special insight about the economy?